Q. Insolvency and Bankruptcy Code (IBC) has become a major savior for the banking sector. In this light discuss the impact of new Code on loan recovery and also suggest remedial measures for better implementation of the Code.

Structure of the answer:

  • Background
  • Introduction (about IBC)
  • Positive impact of IBC
  • Lacunas
  • Suggestion and way forward

Model Answer

Before the passing of IBC it took an average of 4.3 years to resolve insolvency and recovery rate was 25.9% as compared to developed countries where recovery rate was 72%.

The salient features are:

  • Consolidation of various laws on insolvency.
  • The resolution process has to be completed within 330 days, including litigations and other judicial process
  • Formation of Insolvency and Bankruptcy Board of India (IBBI) for regulating Insolvency professionals.
  • Specialized agencies for adjudication in form of NCLT for Companies and LLPs and Debt recovery tribunals for others.

Positive impact of IBC:

  • Improvement in average recovery from 26% to 46%.
  • The Code has created a deterrence effect as seen from the fact that around 3,500 cases involving default of 2 lakh cr. were withdrawn suggesting creditor recovered money from debtor by threat of IBC.
  • NPA worth 40,000 to 50,000 cr. have been converted into standard assets that has freed the resources for wealth creation.
  • IBC has promoted behavioral change among promoters.
  • The Code has reduced the burden on taxpayers as otherwise taxpayers would have to foot the burden of recapitalization of banks.

Yet there are certain challenges before the existing code:

  • The Section 29A of the Code has debarred certain entities thus brought down competition in bidding thereby resulting into reduced recovery.
  • Most of the cases before the NCLT has failed to adhere to strict timeline of 180 days resulting in losses for the creditors.
  • The conflict between the rival creditors (operational and financial creditor) has added to delay and confusion. For ex- Standard Charted bank as a operational creditor challenged the resolution plan as prepared in Essar steel case.
  • Threat of vilification by investigating agencies has created problems for the banks in taking a haircut.

Way forward: Considering the above issues there is a need for:

  • Quality resolution professionals, capacity building of NCLT in terms of creation of more benches and manpower.
  • Moreover, once a resolution plan has been approved no objection should be entertained.

The principal stakeholders in insolvencies such as NCLT, Resolution Professionals, Committee of Creditors need to expedite resolution process.

Subjects : Economy